Differential drug cost sharing (DCS), a measure that increases patients' co-payments for more expensive drugs, is increasingly used by U.S. health plans to contain drug costs. In our current AHRQ study we showed that a province wide DCS policy in British Columbia, Canada, was successful in reducing drug expenditures without substitution effects or adverse health outcomes, partly due to generous exemptions for frail -elderly patients through a prior authorization process. The prior authorization is burdensome and costly and reduced overall program savings. By contrast a policy in Germany which required physicians to prescribe within fixed drug budgets was financially successful but left concerns about adverse clinical outcomes. A combination of reference pricing and prior authorization accounts could combine benefits of both approaches and reduce their negative aspects. The current application is a competing continuation of that AHRQ grant (RO1HS10881). Based on this international experience we propose to test the hypothesis that such a hybrid policy is equally safe, improves the cost-effectiveness of prescribing, and reduces healthcare expenditures. We will conduct a cluster-randomized effectiveness trial in which 60 pair-matched physician networks in British Columbia will be assigned either to the experimental policy or the existing coverage. The intervention will be applied for 12 months. We will assess drug and healthcare utilization outcomes using linkable administrative databases as well as patient- reported outcomes. The trial will be implemented among residents over age 65, in the context of a stable healthcare system with complete access to care, universal drug coverage for the elderly, and experience in randomized effectiveness trials. We will test the effectiveness of the new policy, including the rate of hospitalizations, physician visits, medication use, overall healthcare expenditures, and patient-reported health status. The project will result in a better understanding based on randomized trial data of how and to what extent a combination of differential cost-sharing and physician-based budgetary approaches to drug cost containment can reduce drug expenditures while providing high-quality comprehensive drug therapy, reduce administrative burden, and increase acceptance in a practice setting. This will be immediately applicable to the growing number of U.S. health plans and government programs that offer drug coverage with differential cost-sharing. It should further provide a set of refined tools describing how to plan, implement, and execute drug cost-saving measures, including a pre-policy impact-simulation software.